Option trading series – Week 12

Dear readers and traders, our portfolio has shifted from the last article to the new highs and currently reaches + 1.52%. If we would not open ETF: KOLD hedge positions, our performance would have reached + 2.52%, but of course it is not an excuse, just a statement :). Hedging positions still have their meaning, and we will surely create from them profitable positions during this winter.

The current status of the portfolio looks like this:

Obr.1: Account Overview

Portfolio´s Delta

In order to bring you more practical information, we have decided to describe how to calculate the delta of the portfolio.

Obr.2: Portfolio´s delta

From the table above, you see that we first have to recalculate the leveraged ETF to the common denominator – we have selected 1x leveraged ETF: UNG as the base. Thus, UNG has the leverage 1x, BOIL leverage 2x, KOLD leverage -2x. If we multiply the leverage, delta, and number of options for each position (column 6 is the result of multiplication of columns 3,4,5), we will obtain total delta of each position free of leverage. Now we have to take into account the different cost of the underlying asset for each position, so for the total dollar exposure we multiply column 6 with column 7. The total exposure in UNG was $ 7,006, which is a very small exposure for the $ 100,000 portfolio.

If the price of gas increases, the delta of our short positions will increase, and our hedged delta will decrease, so we will increase the exposure of gas shorting, which is desirable from a long-time perspective. At the same time, if the gas price should continue to fall, our aggregate delta could get to positive numbers and that we would not like so much as we would breach our mandate of capitalizing on the collapse of inefficient ETFs due to gas contango and its shorting.

It is logical, however, that if the gas drops too much and will become fundamentally too cheap, it is nonsense to be short, but one should also be able to open long positions. So, do not be surprised if in the future we will be also slightly net long. It is certainly not a breach of our logic of the long-term gas -ineffective ETS shorting, merely it is a tactical intention to use excessive undervaluation of the price of natural gas.